Estimating the Optimal Hedge Ratio in the Indian Equity Futures Market

IUP Journal of Financial Risk Management, Vol. 6, Nos. 3 & 4, pp. 38-98, September & December 2009

Posted: 7 Jan 2010

See all articles by Kapil Gupta

Kapil Gupta

affiliation not provided to SSRN

Balwinder Singh

Guru Nanak Dev University - Department of Commerce and Business Management

Abstract

The present study attempts to suggest an optimal hedge ratio for Indian traders through the examination of three indices, i.e., Nifty, Bank Nifty and CNXIT, and 84 most liquid individual stock futures traded on the National Stock Exchange of India, over the sample period January 2003 to December 2006. The present study compares the efficiency of hedge ratios estimated through OLS, VAR, VECM, GARCH(p,q), TARCH(p,q) and EGARCH(p,q) in the minimum variance hedge ratio framework, as suggested by Ederington (1979). The Findings of the present study conform to the theoretical properties of futures markets and suggest that unconditional hedge ratio, after controlling for basis risk, outperforms the conditional hedge ratio. The results favor the hedge ratios estimated through VAR or VECM because both the markets are cointegrated in Engle and Granger (1987) framework, and the findings are consistent with that of Alexander (1999).

Suggested Citation

Gupta, Kapil and Singh, Balwinder, Estimating the Optimal Hedge Ratio in the Indian Equity Futures Market. IUP Journal of Financial Risk Management, Vol. 6, Nos. 3 & 4, pp. 38-98, September & December 2009. Available at SSRN: https://ssrn.com/abstract=1532016

Kapil Gupta (Contact Author)

affiliation not provided to SSRN ( email )

Balwinder Singh

Guru Nanak Dev University - Department of Commerce and Business Management ( email )

Department of Commerce and Business Management
Guru Nanak Dev University
Amritsar, Punjab 143005
India
09417272232 (Phone)
0183-2255564 (Fax)

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